Naked Short Selling

Naked Short Selling

The sale of shares one has neither borrowed nor made arrangements to borrow. Under Regulation SHO, investors engaging in naked shorting much abide by a "locate" requirement and a "close-out" requirement. The locate requirement forces brokers to have reasonable grounds to believe that the short-sold security can be borrowed; the broker must document this prior to the security's sale. With some exceptions, the close-out requirement means that brokers who have failed to deliver a short-sold security for 13 days must purchase similar securities and present those instead. Naked shorting is very high risk.

Spain and Portugal adopted this proposal in May 2010 which in effect extended the obligation to report naked short selling to all Spanish and Portuguese shares while introducing the adoption of CESR thresholds of 0,2% and 0,5% of an issuer's capital for private and public disclosure

Market supervisors in the European Union could be given powers to temporarily ban naked short selling of credit default swaps and shares in times of extreme volatility, the bloc's executive body said on Monday.

The equity market's nerves were pretty frayed to begin with but their mood worsened last week as the German authorities announced a ban on naked short selling on a number of key companies and certain fixed interest investments (naked short selling is the practice of short-selling a financial instrument without first borrowing the security or at least ensuring that the security can be borrowed, as is usually done in a short sale).

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